Wells Fargo & Co (NYSE:WFC), the largest U.S. home lender, plans to stop offering advance loans to direct deposit customers.

Wells Fargo

U.S. Bank too is stopping the payday-loan-like product that invited warnings from regulators.

OCC’s concern for Wells Fargo and others

Wells Fargo & Co (NYSE:WFC) will cease offering advance loans to direct deposit customers starting February 1, while Minneapolis-based U.S. Bancorp (NYSE:USB), the nation’s largest regional lender, said its program would end January 31. Earlier Cincinnati-based Fifth Third Bancorp (NASDAQ:FITB). Regions Financial Corporation (NYSE:RF) too announced January 15 that it would discontinue its Ready Advance service this year.

Elizabeth Dexheimer and Dakin Campbell of Bloomberg point out that banks are abandoning these products amid intensifying scrutiny from regulators about their high costs and similarities to payday lending. According to 2010 estimates from Aite Group LLC, with the majority of lenders offering these services exiting the market, they risk losing the potential to generate $500 million in fees, as customers seek alternative forms of short-term credit.

Last year, the Office of the Comptroller of the Currency offered banks guidance on advance direct lending indicating its main concern was ensuring the products don’t post ‘undue risk to safety and soundness’.

Harbinger of things to come

The exit of Wells Fargo & Co (NYSE:WFC), U.S. Bancorp (NYSE:USB), Fifth Third Bancorp (NASDAQ:FITB), and Guaranty Bancorp (NASDAQ:GBNK) could be a harbinger of things to come as banks anticipate tougher rules on an array of consumer products, including prepaid cards. Moreover, a number of advocacy groups have decried the products for carrying the same triple-digit interest rates and balloon payments as payday loans. Last November, the OCC and the FDIC imposed tighter restrictions on the loans.

Some banks point out that though the regulators did not bar banks from offering the product, the new rules were stringent enough to make the line of business untenable.

A study by the Consumer Financial Protection Bureau found that more than half of direct­-deposit borrowers took out advances totaling $3,000 or more. Of those borrowers, a majority paid off one loan and went back for another within 12 days. The average borrower took out 10 loans in a year and paid $458 in fees. At least 15 states have banned the loans, while several others have imposed strict laws to limit the interest rates and the number of loans that can be made.

In a statement, Wells Fargo indicated that the bank is dedicated to helping its customers succeed financially and will work with customers to help them understand the changes and their options.